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** This article has been revised from its original version which was published on January 14, 2019
Question: I created an Irrevocable Medicaid Asset Protection Trust. Do I need to file a tax return for the trust?
Answer: Let’s start by defining the trust. Appropriately named, a Medicaid Asset Protection Trust (“MAPT”) is created to shield assets from Medicaid in order to preserve them for your family and generations to come. If properly drafted and funded, assets transferred to your MAPT are not considered “countable” for Medicaid purposes.
A MAPT is an irrevocable trust, which means that when you fund the trust with your assets, you are actually transferring ownership of those assets to the trust. This is exactly why Medicaid does not consider the assets to be countable.
What does this mean for purposes of filing a tax return?
In general, most irrevocable trusts must file an IRS Form 1041 (U.S. Income Tax Return for Estates and Trusts) and a New York State Form IT-205 (New York State Fiduciary Income Tax Return). These income tax returns are filed annually and reflect the trust’s income-generating activity, just like your individual tax return (often Form 1040).
However, some irrevocable trusts are considered to be grantor trusts for federal and state income tax purposes. For a grantor trust, filing forms 1041 and IT-205 are optional. A grantor trust is a type of trust where the grantor (or the creator) has retained certain powers concerning the trust or assets in the trust. The IRS will “look through” the trust and consider the grantor to be the owner of the assets for tax purposes. But don’t worry; tax rules and Medicaid rules are different. So even though the IRS/NYS tax authority may view the grantor as the asset owner for income tax purposes, Medicaid will not.
When a grantor is treated as the owner of any portion of the trust, the income generated and the accompanying deductions and credits “flow through” with regard to individual tax liability. As a result, if applying the grantor trust rules result in the grantor owning all of the assets in the trust for income tax purposes, then the grantor will consider all items of income, deduction, and credit when computing and preparing their individual tax return.
In this instance, it is general practice to have your tax return preparer file an informational return for the trust, which includes only the trust’s name, address, and identification number (i.e., the grantor’s social security number) to tell the tax authorities it is a grantor trust.
Work with an Estate Planning Attorney
If you have prepared and funded a MAPT, speak with your attorney and confirm whether the trust is considered a grantor trust for income tax purposes. If you don’t have an attorney, choosing and working with a law firm can be stressful. Often you don’t know what the process is, what it will cost, and whether the law firm will even be able to help you!
Benefit from our experienced, caring, and compassionate staff. Consult with the experienced estate planning lawyers at Russo Law Group, P.C., to discuss tax consequences or advantages with different types of trusts. We can design a trust to accomplish your specific needs without adding to your tax burden. Our team of elder law attorneys, estate planning attorneys, and special needs (disability) attorneys have represented seniors and their families since 1985. Contact us or take advantage of our free seminars and webinars to learn more about how Russo Law Group, P.C., may assist you with irrevocable trusts.
Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530
Choosing and working with a law firm can be stressful. Often you don’t know what the process is, what it will cost, and whether the law firm will even be able to help you! To feel confident in your choice, and to know that your confidence is not misplaced, you should look for much more.
Our team of elder law attorneys, estate planning attorneys, and special needs (disability) attorneys have represented the elderly and persons with special needs/disabilities and their families since 1985. In most professional occupations there is no replacement for experience. At Russo Law Group, P.C., our caring and compassionate staff have been involved in literally thousands of cases. Our experience is your protection.